The bitcoin halving is an economic feature integrated into the protocol, designed to make it more valuable and scarce over time.
Most people in bitcoin have an idea of what miners do, but not all are aware of what variables they are subjected to by the protocol and the market.
Let’s remember that bitcoin (blockchain) is the first protocol based on market forces for ensuring its security.
Bitcoin mining reward
The Bitcoin network rewards the miners with 12.5 Bitcoin on each block every 10 minutes, this is an incentive to secure the protocol. The more miners are present in the ecosystem the more secure the network is. But this reward has been changing every 4 years. The Bitcoin block reward halves every 210,000 blocks and the 14 of May of 2020, the reward will be reduced to 6.25 bitcoins.
This means that the cost for the miners will increase and they will have to sell their Bitcoin at a higher price in order to turn a profit, this protocol feature is meant to reduce inflation over time.
In every past halving, the price has increased drastically and is suspected that the next year will be the same.
At this moment 85% of the max bitcoin supply has been mined. The actual inflation rate is 3.72% and next year it will be 1.8%, and by 2140 all Bitcoin will be mined, 21 million in total.
1,800 Bitcoin are generated per day and it will be reduced to 900 and so on every halving, so get ready for May and buy some Bitcoin!
These 4-year cycles are an inherent economic feature of Bitcoin, the price is based on supply and demand. The protocol is reducing the Bitcoin supply while the demand for Bitcoin grows over time. This causes the price of Bitcoin to go up, reducing the bitcoin inflation by half each halving.
The cost of mining one bitcoin is about 60%-75% of the price, that’s why when the price goes down and the protocol difficult is too high, many miners decide to stop operations until one of 2 things happens, either the price goes up or the difficulty goes down.
The difficult responds to the total power of the miners, if the blocks are resolved too fast by the miners the protocol will add zeros to the encryption of the block, in order to make it more difficult to mine. Also, the other way around, if the blocks are resolved too slow it will reduce the number of zeros in the encryption.
All these variables affect the Bitcoin price, as miners are responsible to get new Bitcoin into the market. Mining in the early days used to be something you can do on your computer.
Today special hardware has been developed for this purpose and huge “mining farms” around the world work around the clock with thousands of devices to secure the protocol.
The total hash power of Bitcoin equals hundreds of thousands of the most powerful computers in the world.
Every bitcoin halving in the past had an effect on the Bitcoin price, up to 10x, but no one knows with certainty this is bound to happen again as there are many more variables involved, but get ready for May and buy Bitcoin! Bitpanda is one of the leading exchanges where you can buy Bitcoin. If you want to know more check out our Bitpanda Review!